"Derivative"exercise:call option
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Questions 1:
For a call option, if the underlying asset’s value is less than the option’s exercise price, the option is said to be:
A 、at the money.
B 、out of the money.
C、 in the money.
Questions 2:
In efficient financial markets, risk-free arbitrage opportunities:
A、 will not exist.
B 、may persist in the long run.
C 、may exist temporarily.
B is correct. If the underlying asset’s value is less than the option’s exercise price, the call option is not worth exercising and is said to be out of the money.
A is incorrect. For an at-the-money call option, the value of the underlying asset is equal to the option’s exercise price, and the option buyer would be indifferent between exercising or not exercising the option.
C is incorrect. For an in-the-money call option, the value of the underlying asset is greater than the option’s exercise price, and the option is worth exercising.
C is correct. In efficient financial markets, risk-free arbitrage opportunities may exist temporarily, but their continuous exploitation will eliminate these arbitrage opportunities in the long run.
A is incorrect. Financial markets being efficient does not mean that risk-free arbitrage opportunities cannot exist.
B is incorrect. In efficient financial markets, any risk-free arbitrage opportunities will exist only temporarily because their continuous exploitation will result in these arbitrage opportunities being eliminated in the long run.
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